Boris to Win 43 Seat Majority Says Meta-Poll

You’ve heard of meta-analyses, where academics who can’t be bothered to do their own research just nick everyone else’s hard work, crunch the numbers a bit, and come out with a super-accurate result? Well here is our META-POLL. After much reading of the papers, surfing the net, and even talking to people, we have concluded that the Tory party will win. (Bet you saw that coming eh?)

Why do we think that?

  1. Farage folded, as predicted here recently, avoided splitting the leave vote, and crowned the Tories as winners

  2. The Labour manifesto was written to appeal to hard-line left wingers – who would have voted for Jeremy anyway. Only the naïve or those too young to remember the 1970s could think that nationalisation is the answer. (See our earlier report on rail user numbers pre- and post – nationalisation). The “free” broadband idea went down well, but the practicalities are horrible. By the time it is built, at five times the original cost, technology will have made it obsolete. And the big beneficiaries will be the farmers and isolated rural communities – who will not be voting Labour under any circumstances. Meanwhile, their fence-sitting on Brexit feels a bit like “Follow Me….. I don’t know where we are going, but Follow Me!”

  3. The Liberal Democrats have shown themselves to be neither liberal nor democratic. Their reverse Article 50 campaign can only appeal to the most die-hard europhiles. Meanwhile, Jo Swinson has not done well. Her claims to be PM in waiting invite the retort that she’ll be waiting a very long time.

  4. The Tories have avoided a May-style manifesto-suicide-note. Divisive figures such as Rees-Mogg have been kept out of the limelight. Boris himself has picked his battles carefully, with more to lose than win.

So what happens now?

There are still considerable risks for Mr Johnson. Will the left-leaning students be too busy recovering from their end-of-term parties to vote?

Students preparing to oversleep and miss voting

Just how many people were too embarrassed to tell pollsters that they would vote Tory (but will anyway)? Will tactical voting have any impact? Will Mr Trump try to intervene? He is not great at keeping his thoughts to himself is he? That could hurt Boris. In this last week, we expect the Tories to try to refocus on Brexit as the major issue – and Labour to try to talk about virtually anything else!

What does it all mean for Asset Prices?

The market had a lost year in 2019, with too much uncertainty. A Tory win is about 70% baked into the market, so we expect a moderate bounce on 13 December. This will be most pronounced for the likes of BT and other nationalisation victims. Despite longer term trading arrangements still being in the air, we feel that 2020 will turn into a log bull run for equities and commercial property, as investors get back to the serious business of making money.

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FTSE Forecast; Brexit Supports, World Economy Undermines

It is that time of the month when we ritually kick ourselves for making what turned out to be a stupid forecast six months ago – and then, without learning from our mistakes – we go on to make a crazy forecast for where FTSE will be in another half year.

Will go up, will go down, but not necessarily in that order

BUT this time, we weren’t so far wrong. Back on 15 April, we had failed to leave the EU on the second deadline, and a new exit-date of 31 October had been decreed. Wisely, or perhaps by luck, we guessed that on 15 October, Brexit might not be established, or the future might be rather worrying. Quote “So we will work on the basis that Brexit is still on-going by October.

Our forecast for 15 October was 7600, quite a reduction from the 8150 we had been predicting for September. Thus, we got the direction right, and a close of 7212 is pretty accurate by our standards.

The Next Six Months

Now for the next six months. British politics are somewhat unpredictable. We think that Boris might just pull it off and squeeze Brexit through tomorrow. The country (or at least 52%) will rejoice….. so there is no way the opposition will allow an election if Brexit goes ahead. Thus our central forecast is that Brexit happens, but then the minority government struggles on for several months until the demand for an election is overwhelming. This could easily be around our forecast date of 15 April 2020. However, a Brexit Deal will create an optimism and gentle release of pent up demand to support the UK economy over the next six months.  Lack of Government interference with new laws will also help!

However, no country is an island. Okay, well some countries are islands. Malta comes to mind. But economically, the future of UK based businesses, with our new, outward looking trade policy, cannot be but affected by the world economy. We foresaw the potential of a recession by year end, and the data published since then has done nothing to change that view. The global economy, from US to China to EU (in that order) is definitely looking soft.

Where does that leave us?

The UK domestic economy should have a surge, this will be countered by weak global growth.

Re-rating

The UK stockmarket, is at rather low multiples of income, given the interest rate environment. This morning, www.dividenddata.co.uk quotes the FTSE100 yield at 4.53%. If / When Brexit is settled, we see scope for yield compression – and hence price rises – justified by the reduced uncertainty and risk.

In summary, we think UK growth will be supportive, global economics will undermine, but an extra boost will be given by removal of the Brexit factor. From a close yesterday of 7182, we see FTSE100 at 7600 on 15 April. This is an increase from the 7200 we expected for Jan – Mar next year.

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FTSE Forecast for January is…….. LOWER!

We’ve been forecasting FTSE100 with a six month timeframe for six months. Which means, oo-er, that we have just reached the outcome of our first prognostication.

Stock Prices green for up, but we think down

The best traditions of economic forecasting is to make the call, try to write some eye-catching blurb – and then MOVE ON, and never re-visit. After all, what is to be gained by checking on whether the forecasts were correct? Sooner or later, the call will be just ridiculously incorrect, which will make the author look stupid. And at other times, it will be spot on, so the writer then starts making hubristic comments about their skill (even though everyone knows it was only luck), and so still looks stupid.

However, one of our many maxims is “You can’t tell stupid”.

FTSE over the last year, with date of forecast shown

And so here goes with our review of January 2019’s forecast. At the time, FTSE was in the doldrums, having fallen for six months. When we made our forecast, it was 6855. We foresaw a reversal, and a strong climb to 8050. Well, we got the change of direction correct. Last night it closed at 7532. So it didn’t climb quite as far as we expected. Blame Brexit for that. The whole world seems to be using Brexit as the catch-all excuse for any under performance, so there is no reason LondonMarketComment can’t do the same! We thought that one way or another, it would be resolved by now and we could all get on with the more interesting parts of our lives. Anyway, we award ourselves 7 out of ten for that call.

The New Forecast.

We’ve been saying for a couple of months that we saw FTSE100 up to 7500 in July, and then a fall to 7200 by November. We got the 7500 right. We now say that the 7200 of November continues into January.

Why do we say this? Right now, the stockmarket has it’s positive head on. Bad Non-Farm Payrolls for May were taken positively. We understand the logic of a weak economy making interest rate rises less likely….. but, er, doesn’t that same weak economy make it harder for companies to make money? Subsequently, the June NFP came in much stronger – but that didn’t dent market sentiment either. So the market is a bit blinkered.

Meanwhile, we can all see risks to the global economy. Nobody knows where the US/China tariffs-that-are-really-strategic-politics will end. Trump and Xi Jinping both need to win this battle of wills. Meanwhile, Europe is catching a cold from Chinese hesitancy. The middle east could blow up (though we don’t foresee that). Oh, and last – and probably least – there is Brexit.

In conclusion, the market is in happy mode, but there are plenty of potential threats over the next six months. A downside surprise feels likely. So we see FTSE struggling to go higher, with a dip due by year end and no climb in January. Doom doom doom!

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Babcock Bargain Basement Buy!

Babcock’s results on Wednesday were condemned by the market.

Babcock 12 month Price Chart looking sad

From a close of 507p on Tuesday evening, by the end of Wednesday the shares were at 460p. The slide continued yesterday, to finish another 9.4% down at 416.7p.

So what was wrong with the results?

Babcock 2019 Results Summary

Chief Executive Archie Bethel said: “We have delivered a robust performance this year, operating profit is in line with our expectations, we have sustained our strong margins and we have improved our cash generation.”

However, there were two issues which have frightened the market. The first is the future outlook, Underlying revenue is expected to fall to £4.9bln from £5.2bln, and underlying profit to fall to £515 – £535mio.

The second issue is that this year’s numbers are only held up by treating some costs as exceptional. The statutory profits are down by 47% and barely cover the dividend.

As shown in the chart above, over the last 12 months the share price has fallen from a high of 862p down to 445p as this article is written. This is the outcome when a company goes from steady reliable growth to figures that are flat at best.

Babcock short positions

We continue to believe in Babcock, despite the weaker share price and continued short positions out there. Profit numbers are derived by accountants’ opinions. So we always follow the cash, which is much harder to fake (unless your name is Pat Valerie!)

In the last 12 months, Babcock has paid out a decent dividend, and reduced net debt from £1,115m to £957m. In the context of slowing profits, this remains a credible performance. We continue to expect these businesses to throw off cash and pay a strong dividend. The present payment rate is 7.2%, according to www.dividenddata.co.uk. We expect cashflow to be there to support this rate going forward, and management has confirmed that there are no plans to cut.

In our previous review of Babcock International Group plc, on 27 February, we stated that the shares were attractive value at 544p.  We suggested we were not calling the bottom of the market, and so it proved!  But if we liked them at 544, surely we love them at 460p?  And indeed we do!

 

At these levels we rate Babcock International Group a strong buy.

 

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FTSE100 Forecast. Don’t Come Back on St Leger Day

The economy seems to keep motoring along, both here and in the US (which drives so much of the world GDP). And yet….. and yet…… and yet, everyone is fearful because of the politicians.

Will May ever go? Will the Brexit uncertainty ever end? Will Trump’s trade war on China undo last year’s tax boost (which was fading anyway)? And didn’t we just call a peak in the latest tech bubble (as signalled by Uber being over-hyped)?

However, the underlying economics are okay, and we see corporate earnings remaining good. But the fear-factor in the UK market is there.

This forecast covers the period to 15 November, so yet again we find ourselves caught in the Brexit will it/won’t it uncertainty. Our expectation (see tomorrow) is that a hard Brexit on 31 October remains a possibility, and this will cause some turmoil in the stock market. In this case, the word ‘turmoil’ has the additional meaning of ‘buying opportunity’.

FTSE positive so far this year

Today FTSE100 is at 7247. We see slow growth upwards over the summer, but softness in September and October due to the politics. Thus, our forecast for FTSE100 on 15 November is 7200.

The old saw says to go away in May and come back on St Leger Day (14 September). We can’t see much joy in buying into the Brexit uncertainty, so we advise “Go away at the end of July, come back in mid-November”. Doesn’t scan as well does it?

Invest in fun not shares

This is more pessimistic than we have been in a while, (see our previous forecasts) but hey ho, sun’s out, surf’s up, life is good eh?

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Uber-rated, Uber-hyped, Uber-priced.

Lastminute’s post-float price chart not looking so good

Could the Uber float be this bubble’s Lastminute.com?

Anyone who lived through the 1999 tech-stock bubble will remember that the Lastminute.com float in March 2000 was as close to a huge flashing warning light (with 100 dBA klaxons sounding) that the market ever gives.  And for those too young to remember, here is Lastminute’s first-year price chart.

And now we have Uber. A company modestly valued at $90bln. Say it quickly, and it doesn’t sound so huge – but it is $90,000,000,000.00 – for a company that is a neat idea, but has yet to turn a profit.

Yet another Uber Prius

Its core business is a booking app for mini-cab drivers. We are all for making life more efficient, and Uber has first mover advantage, but the barriers to entry are pretty low. Anyone could setup a rival, and many have done so.

So one has to ask, will this core business of ordering a mini-cab ever make any money? There are some clear barriers. In London, a legal ruling has determined that the drivers are employees – and hence are due minimum wages, holiday pay and so on. This is under challenge, but potentially will load a large cost increase on to Uber. And then, if they are employees rather than independent businessmen, suddenly Uber will have to start charging VAT. That’s another 20% on the price. In addition, if all the Uber drivers are employees, will there be so many of them hanging around on the London’s Embankment waiting for your call? My guess is that Uber would work much harder at matching supply to demand – so the quick arrival of your Uber-Prius, may slip back too. Much higher prices and worse service is not a great way to develop a business!

So the core business is looking vulnerable to say the least – unprofitable and with significant extra costs on the horizon.

“Ahh” say the fans, just wait until Uber completes its self-driving technology. Than all the above listed complaints go away (with all the drivers). There are just two small problems with this vision;

  1. Such technology is a very long way into the future. My spies in the industry reckon at least 10 years.

  2. Every motor manufacturer on Earth (except Morgan, perhaps) is working at the same target of offering self-driving cars. So there will be a multitude of offerings, and it is far from clear that Uber will have any kind of first mover advantage.

The investment community is often chastised for being too short-term, and worrying only about the next quarter’s figures. We can be sure that at some point in the next 10 years, the market will lose faith in Uber and the shares will crash and burn – which is a very unfortunate event, especially for a car company.

SWERVE AWAY FROM UBER.

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Hurray! Today’s D-Day, The Day for Data Day

Who could fail to be excited by the monthly US Non-Farm Payroll Data Release at 1.30pm London time? The US economy has done well this year, despite bad weather and doom-mongering economists reacting to Mr Trump’s sanctions and tariffs. For Q1 2019, growth was 3.2% (calm down, that’s an annualised figure – the Americans like to make the figures look as large as possible)

Dollars make the world go round
Yes, it is NON-Farm Payrolls, but we like tractor pictures

We are slightly more positive than consensus, forecasting 220,000 for Non-Farm Payrolls – though any number north of 175,000 will not disrupt our view that the US economy is doing fine, and will help stabilise recession worries across Europe. Expect US unemployment to stay near 3.8% and wages to tick up at a nice rate just over 3.0%.

Meanwhile, in Europe, growth has stayed positive, with a 0.4% growth for Q1.

Mark Carney – branded an unreliable boyfriend

And so we come to Mr Carney. The Bank of England’s Governor has been at it again, this time telling the market that they are too pessimistic about rate rises. Like the rest of the City, we think he is working his “unreliable boyfriend” act again. Inflation is under 2.0%, unemployment is below 4.0% and wages are rising at 3.5%. Everything is cool, and rate rises are unthinkable before Brexit. After that, it will all depend on the data.

My former boss always claimed that “if you can’t measure it, you can’t manage it.” I presume he is now enjoying his retirement, busy counting and measuring his stack of cash.  But I bet he still watches the data to see how the economy is doing.

The good news is, we are truly enjoying a Goldilocks economy, growing at just the right rate and ignoring the idiotic, pathetic dramas being played out in Westminster and Washington.

Be happy, and enjoy your long bank holiday weekend!

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The Efficient Market Hypothesis is Bunk*

What an irony! The Efficient Market Hypothesis (EMH) famously claims that the prices of all freely traded items include all known information that could affect that price. This means that it is impossible to beat the market…… as all new price movements are the result of random new information. And yet this can only be correct if there are sufficient people out there trying to buy low and sell high – ie, trying to beat the market! So the only way EMH can be true is if sufficient people do not believe in it! For more on EMH, click here.

Warren Buffet, Sage of Omaha

Within investment circles, it has become popular to claim that the fund management industry cannot beat the market – and so investors should just buy an index tracker and save some fees. Whilst it is technically true that Fund Managers incur trading costs, and so on average must perform slightly worse than the market, we believe that the market is not efficient and so there is value to be had. Nobody can dispute that Warren Buffet manages to find value in the market nearly every year.

One only has to examine some of the assumptions of EMH. The most scary is that people are rational automatons. Now I understand that some economists live in a cloistered world, but even they must admit that this assumption is there because it makes the theorising easy, rather than it being a reflection of reality. If anyone believes in “homo-rationalis”, please take a break from whatever you were planning to do today and read Kahneman and Tversky’s Prospect Theory.

Charles Mackay

Done that? Good, so now we are all agreed that people make decisions which are not wholly rational. Perhaps this was stated most clearly by Charles Mackay in his treatise about men going mad in herds.

If you are still not convinced (how can that be?) think of all the investors who make money from trend-following in financial markets. In polite circles this is called ‘Momentum Trading’, or less positively it is known as “The Bigger Fool Theory”. Sharp readers will note that neither of these epithets refer to the underlying value of the security, just the way its market price is moving in a consistent direction. EMH cannot explain market bubbles – from tulip-mania to the tech-bubble to the Great Financial Crash of 2008 to bitcoin, these crashes occurred when investors slowly realised that perhaps values were a bit toppy – and all headed for the door at the same time! If the market was truly rational, nobody would buy bitcoin at all!

And you know what, sooner or later there will be yet another financial meltdown caused by over-optimism meeting cold hard facts……… And EMH will die again!

* Henry Ford is famous – among other things such as starting a car company, and introducing mass production techniques – for saying “History is Bunk”. We don’t agree with that, preferring George Santayana’s “Those who ignore history are condemned to repeat it.”

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Tariffs for a No Deal Brexit – The Negotiations Continue

Clever move eh? Cutting tariff levels to zero on a wide wide range of imports has two clear messages;-

Goods Being Imported
  1. To the EU that perhaps they need to be a bit more flexible in their no-more-negotiations approach, or they can expect their exports to UK to decline drastically (especially hot topics like Irish farmers and German car-makers)

  2. To the UK consumers – who tend to be voters – that leaving the EU without a deal could have some upside too, with cheaper prices for a wide range of goods.

So they just need to protect the farmers (hence still some taxes on imports of agricultural products) to avoid any bad publicity.

Oh, and a third message to Brexit Nerds (such as us). The May Deal is still open for negotiation.

The fun goes on!

Cheaper Imports?
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FTSE100 Still Going Higher Despite Brexit Chaos

It is time for another 6 month forecast for FTSE100. We continue to see a much stronger stock market in London.

In January, when shares were at 6855, we stuck our necks out (a very long way given present uncertainty) and forecast FTSE at 8050 by 15 July.

See http://londonmarketcomment.co.uk/uk-equities/uk-equities-ftse100-up-to-8050-in-6-months/

As of last night, the index was at 7129. So I guess that is so far so good – though it is way too soon to start crowing about our success. Who do you think I am, Donald J Trump? He rather unwisely took the credit last spring when the Dow was flying. He’s been untypically silent on the subject since it retraced!

Over the month since our last forecast, well pretty much nothing has changed. Brexit is still the same. Unsurprisingly, UK growth was slightly softer in December. The US economy had good employment numbers, the EU economy was totally flat, who knows about China? Inflation was falling in general.

So we still see small upticks as Brexit nears the Fig-Leaf-Deal that we continue to expect. It was pleasing that Andrea Leadsom on Radio 4 described such an outcome today – though she didn’t give it our slightly derogative name.

Once the Brexit risk is settled, we see a relief rally in the late spring – and then sideways over the summer. Thus our forecast for August is the same as we called for on 15 July.

We see FTSE on 15 August at 8050.

It’s not very headline-worthy saying that we think the same as we did last month is it? Oh well, if you want excitement, I suggest that instead of market-watching, you take up kite-surfing instead.

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